Theres an interesting trend going in subscription ecommerce where people order goods on quarterly or monthly subscription basis. This is a new reinvention of a very old idea, and lots of cool companies from Shoedazzle to Guyhaus are emerging in this market. In this post, Ill share some thoughts about the nature of the #subcom market and the opportunities it creates.

For background, check out this infographic from KISSMetrics & Sean Percival:

Source: Box It Up – The Rise of Subscription Commerce

Curation versus Personalization

The most important part of the customer experience is the box and its contents. Every week when subscribers get their box in the mail, they must be absolutely delighted.

It seems that these companies are taking one of two approaches either have experts curate the contents of the box, or enable users to select what goes in the box, often suggesting other items later.

There are major historical precedents for both of these models succeeding in media the book of the month club, which became a huge business in the 1920s and 30s. The other model of selection with computer aided personalization helped NetFlix rise to prominence and millions of subscribers.

After a brief analysis of the market, it seems that services targeting a value proposition around deals tend to go with a curation-based model companies like ShoeDazzle, Birchbox, and Stylemint deliver their value this way. By contrast, companies with a value proposition focused more around value and convenience tend to pick personalization Manpacks and GuyHaus are examples of these companies.

Both of these models have consequences. With curation-based customer delight, companies have to source and deliver great merchandise that delights the customer. This merchandising skill is the main driver against churn which is one of the biggest problems subscription commerce companies face.

By contrast, the personalization companies need to execute incredibly and are playing a game based on margins. This makes them vulnerable to players like Amazon.com, who can drive economies of scale with their size.

One Box to Rule Them All

There are a tremendous number of small players in this market, and a few larger ones like ShoeDazzle and Birchbox that are scaling. I imagine there are a number of large companies both ecommerce companies like Amazon and BlueNile and traditional companies like Sephora and Walmart that are watching this space with baited breath.

However, this sector creates great opportunities for consolidation and exits. I dont see consumers subscribing to a large number of boxes it seems like it would be easier for a company like ShoeDazzle to intrude into Birchboxs territory, and create one box to rule them all. Similarly, I wouldnt sign up for a subscription from GuyHaus, Manpacks, and a company that delivers razors I would simply order all of them from one vendor.

Capital Intensity and the VC Opportunity

Subscription ecommerce businesses require inventory and massive subscriber acquisition to scale, neither of which are cheap. While these companies are inexpensive to start (especially if you store inventory, and pack and ship out of a spare room), theyre very expensive to scale.

This creates a major opportunity for venture capital investors to add value. While web companies are getting cheaper to start and scale due to the growth of open source software and free distribution platforms like Google, Facebook, and Twitter, these subscription ecommerce companies are still costly to grow.

Expect to see some major venture wins in this space as ShoeDazzle and others get acquired by forward thinking retailers, or become large retailers themselves.

Economic Sensitivity

It seems to me that these companies as a whole are very vulnerable to the economic environment, and the onset of a double-dip recession in the United States could really hit this whole category. I dont see people keeping a $40/month shoe subscription through tough economic times.